2018 (5) TMI 1269 - HC - Income Tax

Allowability to exemption u/s. 11 25.66 crores. It was pointed out that the current fair market value of the property would come to 36.28 crores and the rent had been valued as per the prevailing rate fixed for the purpose of stamp duty. The assessee also pointed out that if 10% fair return on the investment was considered the rent would come to 3.60 crores per annum as against which rent of 1.98 crores was paid. The CIT (Appeals) was also influenced by the fact that the lease had a locking period of 30 years. It can be seen that the entire issue is in the realm of appreciation of materials on record. CIT (Appeals) and the Tribunal concurrently came to the conclusion that the rent was not excessive. The application under section 13(1)(c) of the Income Tax Act therefore would be ruled out. - Decided in favour of assessee.

Summary

Issues:
1. Exemption under sections 11 and 12 of the Income Tax Act.
2. Diversion/benefit of funds to the author of the trust or his relatives.
3. Measurement of reasonableness of payment to specified persons.
4. Allowance of impugned corpus fund without appreciating section 13(3) provisions.
5. Allowance of impugned development fund without appreciating section 13(3) provisions.
6. Allowance of expenditure on donation without appreciating section 13(3) provisions.
7. Allowance of investment in fixed assets without appreciating section 13(3) provisions.

Analysis:
1. The appeal involved questions related to the exemption under sections 11 and 12 of the Income Tax Act, specifically in the context of violating provisions of section 13(3) of the Act. The main issue centered around rent payments made by the assessee to trustees or their Hindu Undivided Family (HUF), where the karta was the trustee. The Assessing Officer disallowed the exemption based on section 13(1)(c) due to the rent payments. However, the CIT (Appeals) and the Tribunal found that the rent was not excessive after detailed examination of the valuation of the land and building leased to the trust. The fair market value and prevailing rates were considered, leading to the conclusion that the rent paid was reasonable. Consequently, the disallowance under section 13(1)(c) was ruled out.

2. The issue of diversion or benefit of funds to the author of the trust or his relatives was also raised. The Tribunal's decision to allow such diversion or benefit was likely based on the finding that the rent payments were not excessive and were in line with prevailing market rates. This decision further supported the overall exemption under sections 11 and 12 of the Act for the trust's income.

3. Regarding the measurement of reasonableness of payment to specified persons, the Tribunal's decision to consider prevailing market rates and fair returns on investment in determining the rent amount demonstrated a thorough analysis of the payment's reasonableness. This approach aligned with the basic nature of charity while ensuring compliance with the Income Tax Act's provisions.

4. The allowances of the impugned corpus fund, development fund, expenditure on donation, and investment in fixed assets were all permitted by the Appellate Tribunal without appreciating the provisions of section 13(3). However, these allowances were likely justified based on the Tribunal's findings regarding the reasonableness of the rent payments and the overall compliance with the Act's requirements for exemption under sections 11 and 12.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the Tax Appeal as the main issue of excessive rent payments to trustees or their HUF was found to be reasonable and not in violation of section 13(1)(c) of the Income Tax Act.